Cambridge International as and a level Economics Ebook

To prevent dumping
Th
ere may be an economic justifi cation for imposing 
trade restrictions in the case of dumping as this practice 
may be regarded as unfair competition. 
Dumping
involves selling products at below their cost price. 
In the short run, home consumers will benefi t from 
dumping as they will enjoy lower prices. In the long 
run, however, if the foreign fi rms drive out the domestic 
fi rms, they may gain a monopoly and then raise their 
prices. Indeed, foreign fi rms may engage in dumping 
with the specifi c intention of gaining control of a market 
in another country by destroying existing competition 
and preventing new domestic fi rms from becoming 
established.
Foreign fi rms may be able to engage in dumping by 
covering losses with previous supernormal profi ts, by 
charging high prices in their home markets or because 
they receive subsidies from their governments.
In practice, it can be diffi
cult to determine if dumping 
is taking place or whether the foreign fi rms have gained a 
comparative advantage.
Dumping: 
selling products in a foreign market at below 
their cost of production.
KEY TERM
To improve the terms of trade
If a country purchases a large proportion of another 
country or countries’ exports of a product, it may be able 
to force down its price. By imposing trade restrictions, it 
can lower demand and as its demand is signifi cant this 
may lead to a lower price. Th
is will improve the country’s 
terms of trade and allow it to purchase more imports for 
the same quantity of exports.
Similarly, if a country accounts for a signifi cant 
proportion of the world’s supply of a product, quotas on 
its exports may improve its terms of trade. Restricting the 
supply of exports will drive up their price and so increase 
the purchasing power of exports.
Of course, such action distorts trade and is likely to 
reduce global output. It may also provoke retaliation.